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Bombay High Court Strikes Down ‘Quality Work’ Incentive For Appellate Tax Officers

The Bombay High Court struck down incentives given to appellate tax officers, for passing “quality orders” that increased the liabilities of taxpayers.

The incentives were part of the ‘Central Action Plan’ of the Central Board of Direct Taxes aimed at setting targets. A two-judge bench of the high court struck down the incentives following a public interest litigation.

To encourage quality work by commissioner of income tax (appeals), a credit of two units (an incentive for the appellate officer) shall be allowed for each quality appellate order passed, according to the plan. The “quality work” includes cases where:

  • Enhancement (to the assessment order, enlarging of the assessee's liability) has been made.
  • Order has been strengthened, in the opinion of chief commissioner of income tax.
  • Penalty under Section 271(1)I has been levied by the commissioner. This section deals with offences for failure to furnish returns, comply with notices, concealment of income, among other issues.
According to the Petitioners, granting more weightage to such orders would have the possibility of influencing the outcome of the Appeals before the Appellate authorities.
Bombay High Court order

The Challenge

The plan for FY19 contains various provisions by CBDT setting out targets of tax collection, disposal of cases by tax authorities and for awarding points for such disposals. The plan was challenged on two grounds:

  1. Timelines set and directions to the Commissioner (Appeals) to decide appeals within such time, which the petitioners argued would lead to hasty unfair hearings.
  2. Being rewarded for “quality order”, which the petitioners argued are effectively orders argued in favour of the tax department.

However, only the portion about quality order has been struck down.

Also read: Is The Tax Department Unduly Rewarding Its Own To Achieve Revenue Targets?

The action plan sets targets for tax collection. The plan for the contested year noted that heavy litigation has resulted in rendering huge amount of tax uncollectible. This, it said, was a major impediment towards creating an environment of tax certainty. To improve productivity and attain targeted goals, CBDT identified core areas of departmental functioning, while setting targets for them.

Among the targets set by the CBDT was ensuring that each Commissioner of Income Tax (Appeals) disposed at least 550 appeals or achieve a minimum of 700 units during the year. The plan awarded an additional credit of two units for ‘quality’ appellate order passed. Tax effect of more than Rs 50 crore would receive three units upon disposal, for cases between 1-50 crore, the disposal unit would be 2 and for the rest 1 unit.

Senior counsel SE Dastur, while arguing for the petitioners, raised these concerns:

  • Any directives from the CBDT to the Appellate Commissioner to dispose off appeals expeditiously has the possibility of miscarriage of justice, due to the assessee not getting the opportunity to hear for the pressure of deciding the appeals within a timeframe.
  • Since the statutory law doesn't lay down a timeframe, for CBDT to impose such restrictions is impermissible.
  • The prescription for higher weightage for disposal of cases through quality order may consciously or subconsciously influence the authority about the ultimate outcome.

Also read: A Retrograde Change To The Income Tax Appeal Process

On petitioners’ first contention of dealing with the timelines set for appellate authorities to dispose off appeals, the bench noted that when an expert body like CBDT sets out disposal norms for the Commissioner Appeals to achieve, it has the necessary expertise and wherewithal after taking into consideration all relevant factors before coming to a proper conclusion.

The Court wouldn’t substitute its wisdom for that of the CBDT, duly aided and advised by the experts in the field.
Bombay High Court

On the second ‘quality order’ contention, the CBDT had said it was never its intention to compromise the independence and judicial autonomy of the CIT (Appeals) by incentivising orders in favour of department. “Rather CBDT has always upheld their functional autonomy and judicial independence to decide on merits on each case.”

CBDT then redefined ‘quality cases’ to include all appeal orders passed by the commissioner of income tax (appeals), whether decided in favour or against the revenue, where the supervisory principal chief commissioner of income tax or chief commissioner of income tax is of the view that the CIT(A) has devoted more time for ascertaining the facts and passed exceptionally well­-reasoned and speaking order by carefully applying mind to the facts of the case and considering applicable judicial precedents. This will apply to all appeals going forward.

But the bench noted that the contingencies mentioned in the plan necessarily point to circumstances where the order passed by the Commissioner (Appeals) is in favour of the revenue.

It's neither possible nor necessary to judge the actual effect of such guidelines on the orders passed by the appellate authorities, the judgement says. Even as CBDT has withdrawn these guidelines for the coming years, they cannot be said to have an effect for the past financial year, it added. With that, it struck down the portion of the Central Action Plan.